Tuesday, June 7, 2011

Your home is not an asset

Scather asked me about why I don’t class my home as an asset and suggested I post about it so I will. Thanks Scather. She writes a cool book review site you should check out. She is honest, articulate and funny!

My opinion, which is shared by quite a few people, is that the house you live in is not an asset. Yes it will go up in value and is worth a lot and is something I think you should aspire to own, but it is not an asset. An asset really is something you can liquidate for cash. If you sold your home, you would need to rent elsewhere and not really have anywhere to live, hence making it not really an asset.

If it were a rental property, which you were receiving an income from or a piece of property purchased purely for capital gains, then it could be classed as an asset because you could sell it off at any time. The property you live in is not usually viewed as an investment. You plan on living in it and staying there.

A bank and many other financial business will class your house as an asset and let you borrow against it to purchase other property and things, but realistically this not usually a good idea. You should keep your investments and personal home separate. If your investments turned sour you could lose your home. This is why it is better to keep them separate.

Many people here in Australia do not do this and are not so worried about our housing market since we are set up differently than the USA and our loans have been structured differently, but it does not mean we are not in a bubble and house prices won’t drop. In fact, many experts believe we are about to have just that happen. (Although this has been said for some time now, so you would need to do your own research in the areas you are interested in, as some parts have dropped considerably whereas other suburbs continue to climb.)

Many people have differing views on whether your house is an asset or not and this is just mine. What are your thoughts?

7 comments
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I can see your point, I had never thought of it like that before, so I would have to agree with you.

We need somewhere to live regardless and if we borrow against our home we could potentially lose it. We need to make certain of what we are doing and invest wisely and do lots of research before committing

I completely agree. Also, there isn't any point going on about how much a home is worth unless you are selling it. It's not real money until it's in the bank. Until you sell, it is only potential profit. I can see then why people get into trouble borrowing against the equity in their home that they have no intention of selling if things get bad.

I agree. I have watched my parents invest in expensive homes as their main investment strategy. In some ways there is merit to the traditional Australian practice of buying, renovating and then upgrading but I believe these days most of the benefits are erroded by stamp tax, agents fees etc. Not to mention the cost of servicing a mortgage.

That said, the benefit of investing in buying your family home means that it forces disciplined saving. There is nothing like the feeling of owning your own home -- or conversely the thread of losing it -- to force saving. In terms of dollars and cents you would be better off investing in other strategies, especially as renting is currently cheaper than buying. But how many people really knuckle down and commit to a savings and investment plan if they are not forced to do so?

Even though a house is not liquid, I would still consider it an asset if you currently have equity in the property, and it still has the future potential to increase in value and therefore increase your net worth.

Of course if you bought your home at the height of the boom and held on to it, you most likely you are upside down on your mortgage. That is definitely not an asset.

During the real estate boom when a lot of people had equity in their homes, I was working as a fannie mae underwriter for a major bank. I saw many cases of people taking out large HELOC loans to consolidate their high interest debt, use the money to start a successful business, or buy another property which they later flipped. These people took adavantage of the wealth generated by their homes and made a lot of money.

On the other hand I also saw many people use their newly approved $250,000 line of credit like a giant credit card. They would use it to swipe things like coffee at starbucks. These are of course the first ones that got foreclosed upon when the real estate bubble burst.

My point is whether you consider your primary residence an asset or not, It really depends on how you manage the wealth that your home has created for you

Your house is DEFINITELY NOT an asset, unless you're a landlord! An asset puts cash in your pocket every month. Your personal home takes cash OUT of your pocket every month. Even if the mortgage is completely paid in full, it still takes cash out of your pocket in the form of taxes, insurance, repairs, maintenance, etc.

I'm curious about the potential housing bubble in Australia ... have prices been going up for the past few years (after 2007 or 2008)??

Thanks everyone for your comments.KJ -exactly, we need to research and invest wisely.Alliecat - excellent point "there is no point going on about how much a home is worth unless you are selling it."Taiwanxifu - yes the stamp duty and other fees make it much harder to buy, renovate and sell now. I do agree about the discipline of forced savings with a house. Too bad not many people aim to pay things off early.Michael lee - great comment. I agree that the wealth building is dependant upon how people use the equity. Unfortunately your second scenario is more common. Paula - yes, many parts of Australia are still rising like crazy. Where I used to live has gone up $100,000 in the last year, my current area $50,000 but I do think we are close to having property prices reverse.

A house is an asset when it is paid for. You can sell it for cash, rent it for cash flow and live in it to reduce expenses. The mortgage that you use to pay for the house it the liability. A stock portfolio is an asset even if it takes money out of your pocket in the form of taxes, trading fees, etc. an asset is an item with value.